Small Business Confidence Edges Up, Ever so Slightly

Date: February 11, 2014

EMBARGOED UNTIL TUESDAY,

February 11, 2014 Kelly Hoffman 202-314-2054 (media)

HOLD UNTIL 7:30 A.M. ET Holly Wade 202-314-2022 (research)

Main Street still cautious about the future

WASHINGTON, February 11, 2014- Small business optimism started the year slightly up from December at 94.1 but well below the pre-recession average of 100, according to the National Federation of Independent Business’ (NFIB’s) latest index. On the positive front, owners did find a reason to be more positive about their own sales (a huge 7 point jump in positive expectations) and plan more hiring, with the strongest job creation plans since 2007. However, owners continue to find inventories “too high” and sales and earnings trends continued to deteriorate for more owners. Overall, the Index is still just treading water.

“Employment starts 2014 over a million below its peak in January 2008 and prospects for a major recovery in jobs are not good,” said NFIB chief economist Bill Dunkelberg. “NFIB labor market indicators have recently seen a return to normal (but not expansion) levels, encouraging in that reversals are now less likely. The average increase in workers per firm has also risen in recent quarters, indicating new job creation. However, there are far fewer firms hiring workers than there were in 2007 and many of those still in existence have downsized.

As the midterm elections heat up, economic policy will be dominated by campaigning, not sensible strategies to improve economic growth and job creation. This will, barring a surge in economic activity undoubtedly worsen unemployment and job opportunities in the future.”

A review of the January indicators is as follows:• Job Creation. NFIB owners increased employment by an average of 0.12 workers per firm in January (seasonally adjusted), half the December reading, but a solid number. Seasonally adjusted, 13 percent of the owners (down 1 point) reported adding an average of 3.7 workers per firm over the past few months. Offsetting that, 11 percent reduced employment (up 1 point) an average of 3.3 workers, producing the seasonally adjusted net gain of 0.12 workers per firm overall. The remaining 76 percent of owners made no net change in employment. Forty-six percent of the owners hired or tried to hire in the last three months and 38 percent (83 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.

• Hard to Fill Job Openings. Twenty-two percent of all owners reported job openings they could not fill in the current period (down 1 point). This suggests that the unemployment rate did not change much in January. Fourteen percent reported using temporary workers, unchanged from December.

• Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months deteriorated 2 points to a net negative 10 percent. Fourteen percent still cite weak sales as their top business problem, but this is the lowest since June 2008. The monthly peak was 34 percent, set in early 2010. Seasonally unadjusted, 20 percent of all owners reported higher sales (last three months compared to prior three months, up 2 points) and 34 percent reported lower sales (up 6 points), not a very strong report.

Three percent reported reduced worker compensation and 20 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (unchanged), the best readings since 2008. A net seasonally adjusted net 11 percent plan to raise compensation in the coming months, down 2 points from December. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery. With a net 19 percent raising compensation but a net 2 percent raising selling prices, it is easy to see why profits remain under pressure. Higher compensation costs are not being passed on to customers, but there will be more pressure to do so as Obamacare begins to impact small businesses in 2014.

• Credit Markets. Credit continues to be a non-issue for small employers. Five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Thirty-one percent reported all credit needs met, and 52 percent explicitly said they did not want a loan (64 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only 2 percent reported that financing was their top business problem compared to 24 percent citing taxes, 22 percent citing regulations and red tape and 14 percent citing weak sales.

• Capital Outlays. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 24 percent. Eight percent characterized the current period as a good time to expand facilities (down 2 points). Of those who said it was a bad time to expand (59 percent), 27 percent still blamed the political environment, suggesting that at least for these owners, Washington is preventing their spending on expansion. The net percent of owners expecting better business conditions in 6 months was a net negative 11 percent, unchanged from December. Not seasonally adjusted, 19 percent expected an improvement in business conditions (up 2 points), and 23 percent expect deterioration (down 4 points). A net 15 percent of all owners expect improved real sales volumes, up a huge 7 points, a favorable sign. Overall, it looks like “maintenance mode”, no breakout in spending on the horizon based on these expectations with the exception of expected real sales.

• Inventories.• The pace of inventory reduction continued, with a net negative 4 percent of all owners reporting growth in inventories (seasonally adjusted). However, these are the most benign readings since early 2008. • The net percent of owners planning to add to inventory stocks was a net negative 3 percent (down 1 point), indicating little appetite to add to stocks already viewed as excessive relative to sales expectations.

• Inflation. Thirteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 2 points), and 17 percent reported price increases (up 4 points). Seasonally adjusted, the net percent of owners raising selling prices was a net 2 percent, up 3 points. There is no evidence that firms are able to raise prices even a little, even though they may wish to. Many firms are raising compensation, but not passing those costs on to customers.

Today’s report is based on the responses of 1,884 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of January. Download the complete study at http://www.nfib.com/sbetindex.\

*All net percentages seasonally adjusted unless otherwise noted. The net percentage is the percent with a favorable response less the percent of owners with an unfavorable response.

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NFIB’s Small Business Economic Trends is a monthly survey of small-business owners’ plans and opinions. Decision makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard. The NFIB Research Foundation conducts some of the most comprehensive research of small-business issues in the nation. The National Federation of Independent Business is the nation’s leading small-business association. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington, D.C., and all 50 state capitals.